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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended May 31, 2005

Commission File Number 1-15147

OMNOVA Solutions Inc.

(Exact name of registrant as specified in its charter)

175 Ghent Road Fairlawn, Ohio, 44333-3300

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (330) 869-4200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined as Rule 12b-2 of the Exchange Act).    YES  x    NO  ¨

At May 31, 2005, there were 40,899,187 outstanding shares of OMNOVA Solutions’ Common Stock, par value $0.10.

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OMNOVA SOLUTIONS INC.

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Part I. Financial Information

Item 1. Financial Statements

OMNOVA SOLUTIONS INC.

Consolidated Statements of Operations

(Dollars in Millions, Except Per Share Data)

(Unaudited)

See notes to the unaudited interim consolidated financial statements.

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OMNOVA SOLUTIONS INC.

Consolidated Balance Sheets

(Dollars in Millions, Except Per Share Amounts)

See notes to the unaudited interim consolidated financial statements.

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OMNOVA SOLUTIONS INC.

Consolidated Statements of Cash Flows

(Dollars in Millions)

(Unaudited)

See notes to the unaudited interim consolidated financial statements.

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OMNOVA SOLUTIONS INC.

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

AS OF MAY 31, 2005

(In Millions of Dollars, Except Per Share Data)

Note A – Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. These interim statements should be read in conjunction with the financial statements and notes thereto included in the OMNOVA Solutions Inc. (OMNOVA Solutions or the Company) Annual Report on Form 10-K for the fiscal year ended November 30, 2004, previously filed with the Securities and Exchange Commission.

The balance sheet at November 30, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

In the opinion of management, these interim consolidated financial statements contain all the normal recurring accruals and adjustments considered necessary for a fair presentation of the unaudited results for the three and six month periods ended May 31, 2005 and 2004. The results of operations for the three and six month periods ended May 31, 2005 are not necessarily indicative, if annualized, of those to be expected for the full fiscal year.

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

A detailed description of the Company’s significant accounting policies and management judgments is located in the audited financial statements for the fiscal year ended November 30, 2004, included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

Segment operating profit represents net sales less applicable costs, expenses and provisions for restructuring, severance, asset write-offs and work stoppage costs relating to operations. Segment operating profit excludes unallocated corporate headquarters expenses, provisions for corporate headquarters restructuring and severance, interest expense and income taxes. Corporate headquarters expense includes the cost of providing and maintaining the corporate headquarters functions, including salaries, rent, travel and entertainment expenses, depreciation, utility costs, outside services and amortization of deferred financing costs.

Certain reclassifications have been made to conform prior year’s information to the current presentation.

New Accounting Pronouncements — In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs, an amendment of ARB 43, Chapter 4.” SFAS No. 151 requires certain inventory costs to be recognized as current period expenses. This standard also provides guidance for the allocation of fixed production overhead costs. This standard is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company will adopt this standard in fiscal 2006. The Company has not yet determined the impact, if any, this Statement will have on the financial statements of the Company.

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Note A – Basis of Presentation (Continued)

In December 2004, the FASB issued SFAS No. 123 (Revised), “Share-Based Payment.” This standard revises SFAS No. 123, Accounting Principles Board (APB) Opinion No. 25 and related accounting interpretations, and eliminates the use of the intrinsic value method. The Company currently uses the intrinsic value method of APB Opinion No. 25 to value stock options, and accordingly, no compensation expense has been recognized for stock options as the Company grants stock options with exercise prices equal to the Company’s common stock market price on the date of the grant. This standard requires the expensing of all share-based compensation, including stock options, using the fair value based method. The Company will elect to expense stock options using the modified prospective transition method prescribed in SFAS No. 123 (Revised). The modified prospective transition method requires expense to be recognized for new grants or modifications issued in the period of adoption, plus the current period expense for non-vested awards issued prior to the adoption of this standard. No expense is recognized for awards vested in prior periods. On April 14, 2005, the Securities and Exchange Commission (SEC) announced that it would delay the required implementation of SFAS No. 123 (Revised), allowing companies that are not small business issuers to adopt the Statement no later than the beginning of the first fiscal year beginning after June 15, 2005. As a result, the Company will adopt SFAS No. 123 (Revised) as of December 1, 2005. The Company expects the impact from adoption of this standard to be approximately $0.01 per share in fiscal year 2006. This estimate assumes that the number and the fair value of stock options granted are similar to recent historical amounts. While the Company regularly evaluates the use of share-based payments, its recent practice has been to issue fewer stock options than have been issued in the past, utilizing other forms of incentives such as restricted stock. The actual impact per share would be different in the event the number of options granted or the fair value of options increases or decreases from the current estimate.

In March 2005, the SEC released SEC Staff Accounting Bulletin (SAB) No. 107, “Share-Based Payment.” SAB No. 107 provides the SEC staff’s position regarding the application of SFAS No. 123 (Revised) and certain SEC rules and regulations, and also provides the staff’s views regarding the valuation of share-based payments for public companies. The Company is currently reviewing the effects, if any, that the application of SAB No. 107 will have on the Company’s financial position and results of operations.

In May 2005, the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections.” SFAS No. 154 replaces APB No. 20 “Accounting Changes” and SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 requires companies to apply a retrospective application for reporting a change in accounting principle and differentiates a retrospective application from a restatement. This statement also carries forward the guidance from APB No. 20 regarding the correction of an error and changes in accounting estimates. The Company will adopt this standard in fiscal 2007. The Company does not anticipate a material impact on the financial statements of the Company from the adoption of this statement.

Note B – Inventories

Inventories are stated at the lower of cost or market value. A portion of the inventories is priced by use of the last-in, first-out (LIFO) method using various dollar value pools. Interim LIFO determinations involve management’s judgments of expected year-end inventory levels and costs are subject to year-end LIFO inventory calculations. The remaining portion of inventories are stated using the first-in, first-out (FIFO) method. Components of inventory are as follows:

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Note C – Long-Term Debt and Credit Lines

On May 28, 2003, the Company issued $165 million of 11.25% Senior Secured Notes (Notes) due June 1, 2010. The Notes are secured by all real property and equipment relating to the Company’s ten principal domestic manufacturing facilities. The Company has the option to redeem the Notes after May 31, 2007 at a premium. Interest on the Notes is paid semi-annually on June 1st and December 1st. The Company used the proceeds from this offering to repay outstanding amounts under its then existing revolving credit facility, to terminate its receivables sale program and to pay related fees and expenses.

In addition, on May 28, 2003, the Company entered into a $100 million, senior secured revolving credit facility (Facility). The Facility includes a $15 million sublimit for the issuance of commercial and standby letters of credit and a $10 million sublimit for swingline loans. Borrowings under the Facility are limited to a borrowing base using customary advance rates for eligible accounts receivable and inventory. Borrowings under the Facility are secured by domestic accounts receivable, inventory and intangible assets. The Facility requires the Company to meet financial covenants relating to minimum excess availability. Effective May 18, 2005, the Facility was amended to reduce the applicable interest rate spreads, extend the term of the Facility to November 30, 2009 and provide the Company with flexibility for investment and refinancing opportunities. This amendment did not have an impact on the borrowing base of the agreement. Under the Facility, the Company must maintain an average excess availability of $20 million and at May 31, 2005, the Company was in compliance with this requirement.

Advances under the Facility bear interest, at the Company’s option, at either an alternate base rate or a eurodollar rate, in each case plus an applicable margin. The alternate base interest rate is a fluctuating rate equal to the higher of the Prime Rate or the sum of the Federal Funds Effective Rate plus 50 basis points. The applicable margin for the alternate base rate will vary from 0.0% to 1.0% depending on the Company’s fixed charge coverage ratio and the margin was 1.0% at May 31, 2005. The eurodollar rate is a periodic fixed rate equal to LIBOR. The applicable margin for the eurodollar rate will vary from 1.5% to 2.5% depending on the Company’s fixed charge coverage ratio and the margin was 2.5% at May 31, 2005. The Facility’s average borrowing rate at May 31, 2005 was 5.7%.

The Facility requires a commitment fee based on the unused portion of the Facility. The commitment fee will vary from 0.25% to 0.5% based on the Company’s fixed charge coverage ratio and was 0.5% at May 31, 2005.

At May 31, 2005, the amount borrowed and the available balance under the Facility were $32.6 million and $55.1 million, respectively. The Company had $3.1 million of standby letters of credit outstanding as of May 31, 2005.

Note D – Product Warranties

The Company provides product warranties on its roofing products. The Company’s policy for product warranties is to review the warranty reserve on an ongoing basis for specifically identified or new matters and to perform a detailed study of the reserve on a semi-annual basis to adjust for estimated future costs associated with any open warranty year. The reserve is a highly sensitive estimate based on historical warranty costs and failure rates. A change in these factors could result in a significant change in the reserve balance.

The reconciliation of the warranty reserve for the three and six month periods ended May 31, 2005 and 2004 is as follows:

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Note E – Earnings (Loss) Per Share

The following table sets forth a reconciliation of the numerator and denominator used in the basic and diluted earnings (loss) per share and the computation of basic and diluted earnings (loss) per share:

Options to purchase the common stock and unearned restricted stock of the Company of 5.2 million and 5.4 million during the fiscal second quarters of 2005 and 2004, respectively, and 6.1 million and 6.6 million during the first half of fiscal 2005 and 2004, respectively, were not included in the computation of dilutive per share amounts as they would have had an anti-dilutive effect.

Note F – Stock-Based Employee Compensation

The following table displays a reconciliation of accounting for stock-based awards under the intrinsic value method of APB Opinion No. 25 as compared to the fair value method of SFAS No. 123 for the three and six month periods ended May 31, 2005 and 2004:

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Note G – Comprehensive Income (Loss)

The components of comprehensive income (loss) were as follows:

Note H – Employee Benefit Plans

The following table sets forth a reconciliation of the components of net periodic benefit costs for the Company’s retirement programs:

Based on current pension asset performance, interest rate and discount rate assumptions, the Company does not anticipate making cash contributions to the pension fund during fiscal 2005.

The Company also sponsors a defined contribution pension plan. Participation in this plan is available to substantially all U.S. based employees. Contributions to this plan are based on either a percentage of employee contributions or a percentage of wages paid. The cost of this plan was approximately $0.3 million and $0.4 million for the three months ended May 31, 2005 and 2004, respectively, and approximately $0.7 million for each of the six months ended May 31, 2005 and 2004.

The Company also contributes to a defined contribution pension plan for its U.K. employees. The Company contributes a percentage of the employees’ wages depending upon the age of the employee. The cost of this plan was approximately $0.1 million and $0.2 million for the three month periods ended May 31, 2005 and 2004, respectively, and $0.3 million and $0.4 million for the six month periods ended May 31, 2005 and 2004, respectively.

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Note I – Restructuring and Severance

In connection with the appointment of a new distributor for its Genon and Muraspec brands of commercial wallcoverings during the first fiscal quarter of 2005, the Company substantially completed the exit of its wallcovering distribution business known as Muraspec North America. In the first fiscal quarter of 2005, the Company incurred disposal costs of $3.7 million for inventories, sample books, other assets and related fixed assets not transferred to the new distributor or redeployed within the Company and $1.2 million for severance costs covering 65 employees, offset by $1.2 million resulting from the settlement of certain debt obligations relating to this business and the sale of the Guard brand line to a third party. Of the total $3.7 million charge for this restructuring effort, $0.5 million of inventory related write-downs were classified as cost of goods sold, with the balance classified as restructuring and severance in the Company’s Consolidated Statements of Operations.

Also during the first quarter of fiscal 2005, the Decorative Products segment recorded an additional $0.3 million of severance related to other workforce reduction initiatives. The Performance Chemicals segment recorded $0.3 million of severance resulting primarily from the consolidation of the segment’s leadership under one president. Both restructurings were designed to consolidate operations and reduce costs. As a result of these restructurings, the Company terminated 10 employees. These workforce reduction programs were complete as of February 28, 2005.

During the second quarter of 2005, in connection with the Company’s ongoing efforts to reduce costs, the Company implemented a reduction in force affecting approximately 30 employees across the Company and recorded a charge of approximately $1.0 million for severance and related costs. The Company expects these payments to be completed by the end of its first fiscal quarter of 2006.

For the six months ended May 31, 2004, the Company recorded $0.4 million of restructuring and severance charges primarily in connection with exiting its Decorative Products’ heat transfer business and other workforce reduction initiatives in fiscal 2003.

The following table summarizes the Company’s accruals related to restructuring and severance activities:

The remaining severance obligations will be paid in accordance with the provisions of the employees’ severance agreements. Severance payments are expected to be complete by the end of the third quarter of fiscal 2005. For the six months ended May 31, 2005, $2.1 million of severance payments have been made.

Note J – Contingencies

The Company is subject to various claims, lawsuits and proceedings related to product liability, product warranty, contract, employment, environmental and other matters arising out of the Company’s business. To the extent these claims, lawsuits and proceedings involve personal injury and property damage, the Company believes that it has adequate insurance, however, some insurers have reserved rights and contested coverage. The ultimate resolution of any litigation is inherently unpredictable. As a result, the Company’s estimates of liability, if any, are subject to change and actual results may materially differ from the Company’s estimates. Based on information that is currently available, the Company does not expect that the ultimate resolution of pending claims, lawsuits and proceedings will materially affect the consolidated financial condition of the Company. The effect that the ultimate resolution of these matters may have on results of operations cannot be predicted because any such effect depends on both future results of operations and the amount and timing of the resolution of these matters.

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Note K – Business Segment Information

Segment information has been prepared in accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.” The Company’s three reportable segments were determined based on products and services provided by each operating segment. Accounting policies of the segments are the same as those described in Note A – Basis of Presentation.

The Company’s three reportable business segments are: Performance Chemicals, Decorative Products and Building Products. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately based on fundamental differences in their operations. Management reviews the performance of the business segments excluding restructuring, severance, asset write-offs and work stoppage costs in assessing the performance of and making decisions regarding the allocation of resources to the business segments. Management believes that providing this information in this manner is essential to providing the Company’s shareholders with an understanding of the Company’s businesses and operating performance.

The Performance Chemicals segment produces a broad range of emulsion polymers and specialty chemicals based primarily on styrene butadiene, styrene butadiene acrylonitrile, vinyl acetate, acrylic, styrene acrylic, vinyl acrylic, glyoxal, and fluorochemical chemistries. The segment’s custom-formulated products include coatings, binders and adhesives, which are used in paper, carpet, nonwovens, textiles, construction, floor care, tape, tires, plastic parts and various other applications. Its products provide a variety of functional properties to enhance the Company’s customers’ products, including greater strength, adhesion, dimensional stability, water resistance, flow and leveling, improved processibility and enhanced appearance.

The Performance Chemicals segment consists of two product lines. The Paper and Carpet Chemicals product line encompasses products that have applications in the paper and carpet industries. Paper coatings are used in magazines, catalogs, direct mail advertising, brochures, printed reports, food cartons, household and other consumer and industrial packaging. Carpet binders are used to secure carpet fibers to carpet backing and meet the stringent manufacturing, environmental, odor, flammability and flexible installation requirements. The Specialty Chemicals product line encompasses products that have applications for nonwovens (such as diapers, engine filters, resilient flooring, roofing mat and household scrub pads), floor polish, tape, adhesives, tire cord, textiles, plastic part coatings and construction products.

The Decorative Products segment develops, designs, produces and markets a broad line of decorative and functional surfacing products, including commercial wallcoverings, coated and performance fabrics, printed and solid color surface laminates and industrial films. These products are used in numerous applications, including building refurbishment and remodeling, new construction, furniture, cabinets, transportation, manufactured housing, retail display, consumer electronics, flooring and home furnishings.

The Decorative Products segment consists of three product lines. The Commercial Wallcoverings product line applications include refurbishment and new construction for the commercial office, hospitality, health care, retail, education and restaurant markets. The Coated Fabrics product line applications include residential furniture, commercial furniture, marine and transportation seating, interior structures and soft top covers. The Decorative Laminates product line applications include manufactured housing, recreational vehicle interiors, kitchen and bath cabinets, office furniture, consumer electronics, retail display, flooring and ready-to-assemble furniture.

The Building Products segment provides single-ply roofing systems for the replacement and new commercial roofing markets. The roofing systems are used for various structures including office complexes, health care facilities, shopping malls, stadiums, schools, manufacturing and warehouse facilities and government buildings.

The work stoppage costs of $1.7 million were incurred by the Decorative Products segment. The costs were related to the employee lockout that occurred at the Company’s Jeannette, Pennsylvania manufacturing facility. The costs were included in the costs of goods sold reported for the six months ended May 31, 2005. These costs included the additional costs incurred for plant security, temporary replacement workers and higher than normal operating costs.

No one customer accounted for 10% or more of consolidated sales.

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Note K – Business Segment Information (Continued)

Segment operating profit represents net sales less applicable costs, expenses and provisions for restructuring and severance costs relating to operations. Segment operating profit excludes unallocated corporate headquarters expenses, provisions for corporate headquarters restructuring and severance, interest expense and income taxes. Corporate headquarters expense includes the cost of providing and maintaining the corporate headquarters functions, including salaries, rent, travel and entertainment expenses, depreciation, utility costs, outside services and amortization of deferred financing costs. The following table sets forth a summary of operations by segment and a reconciliation of segment sales to consolidated sales and segment operating profit (loss) to consolidated profit (loss) before income taxes.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company is an innovator of emulsion polymers and specialty chemicals, decorative and functional surfaces and single-ply roofing systems for a variety of commercial, industrial and residential end uses. The Company operates in three reportable business segments: Performance Chemicals, Decorative Products and Building Products. The Performance Chemicals segment produces a broad range of emulsion polymers and specialty chemicals based primarily on styrene butadiene, styrene butadiene acrylonitrile, styrene butadiene vinyl pyridine, vinyl acetate, acrylic, styrene acrylic, vinyl acrylic, glyoxal and fluorochemical chemistries. Performance Chemicals’ custom-formulated products include coatings, binders and adhesives, which are used in paper, carpet, nonwovens, textiles, construction, floor polish, tape, adhesives, tire cord, plastic parts and various other applications. The Decorative Products segment develops, designs, produces and markets a broad line of decorative and functional surfacing products, including commercial wallcoverings, coated and performance fabrics, printed and solid color surface laminates and industrial films. These products are used in numerous applications, including building refurbishment and remodeling, new construction, furniture, cabinets, marine, automotive and other transportation markets, manufactured housing, retail display and store fixtures, consumer electronics, flooring and home furnishings. The Building Products segment provides single-ply roofing systems for the replacement and new commercial and industrial roofing markets. The roofing systems are used for various structures including office complexes, shopping malls, stadiums, schools, health care facilities, restaurants, manufacturing and warehouse facilities and government buildings.

The Company’s products are sold to manufacturers, independent distributors and end-users through internal marketing and sales forces and agents.

The Company has strategically located manufacturing facilities in the U.S., China, U.K. and Thailand.

The Company has historically experienced stronger sales and income in its second, third and fourth fiscal quarters, comprised of the three-month periods ending May 31, August 31 and November 30. The Company’s performance in the first fiscal quarter (December through February) has historically been weaker due to generally lower levels of construction and industrial activity over the holidays and cold weather months.

Management discusses the Company’s operating performance by reportable business segment and provides segment operating profit performance excluding segment restructuring, severance, asset write-offs and work stoppage items because this is the manner in which segment operating results are reported to management for purposes of assessing the performance of the Company’s business segments and in making decisions regarding the allocation of resources to the business segments. Management also believes that providing segment operating performance excluding segment restructuring, severance, asset write-offs and work stoppage items provides additional information that is useful to investors to understand the Company’s businesses and compare operating results period over period.

Segment information has been prepared in accordance with the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 131 “Disclosures About Segments of an Enterprise and Related Information.” The Company’s three reportable segments were determined based on products and services provided by each operating segment. Accounting policies of the segments are the same as those described in Note A – Basis of Presentation. For a reconciliation of the Company’s segment operating performance information, please refer to Note K of the Company’s Consolidated Financial Statements starting on page 12 of this report.

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Key Indicators

Key economic measures relevant to the Company include coated paper production, print advertising spending, U.S. commercial and hotel occupancy rates, U.S. office furniture sales, manufactured housing shipments and housing starts. Key industries which provide a general indication of demand drivers to the Company include paper, housing and building construction, furniture manufacturing and flooring manufacturing. Although these measures provide key information on trends relevant to the Company, the Company does not have available a more direct correlation of leading indicators which can provide a forward-looking view of demand levels in the markets which ultimately use the Company’s products.

Key operating measures utilized by the business segments include orders, sales, working capital turnover, inventory, productivity, and fill-rates which provide key indicators of business trends. These measures are reported on various cycles including daily, weekly and monthly depending on the needs established by operating management.

Key financial measures utilized by the Company’s management and business segments in order to evaluate the results of its business and in understanding key variables impacting the current and future results of the Company include: sales, gross profit, selling, general and administrative expenses, interest expense, operating profit before excluded items, earnings before interest, taxes, depreciation and amortization, working capital, operating cash flows and capital expenditures, including applicable ratios such as inventory turnover, average working capital and return on sales. These measures, as well as objectives established by the Board of Directors of the Company, are reviewed at monthly, quarterly and annual intervals and compared with historical periods.

Results of Operations for the Three and Six Months Ended May 31, 2005 and 2004

The Company’s net sales for the three months ended May 31, 2005 were $209.3 million compared to $189.5 million for the three months ended May 31, 2004. Both the Performance Chemicals and Building Products segments experienced revenue increases, with Performance Chemicals 28.9% higher and Building Products 4.3% higher, while the Decorative Products segment experienced a decrease of 11.3%. Included in the Decorative Products segment net sales in the second fiscal quarter of 2004 are $3.9 million of net sales relating to the Company’s former wallcovering distribution business, which was exited in the first fiscal quarter of 2005. Excluding these, the Decorative Products segment net sales decreased 6.1%.

Net sales for the six months ended May 31, 2005 were $397.3 million compared to $349.4 million for the six months ended May 31, 2004. Excluding the former wallcovering distribution business net sales of $2.7 million and $7.0 million for the first half of 2005 and 2004, respectively, net sales for the first half of 2005 were $394.6 million compared to $342.4 million for the first half of 2004.

The Company had a segment operating profit of $11.9 million in the second quarter of fiscal 2005 compared to a segment operating profit of $8.7 million in the same period in fiscal 2004. Included in segment operating profit for the second fiscal quarter of 2005 were restructuring and severance charges of $0.9 million resulting primarily from previously announced workforce reductions. Included in segment operating profit for the second fiscal quarter of 2004 were restructuring and severance charges of $0.1 million relating to restructuring activities in fiscal 2003. Excluding these items, segment operating profit was $12.8 million in the second fiscal quarter of 2005 compared to $8.8 million in 2004. Operating margins for the second fiscal quarter, excluding these items, increased to 6.1% in fiscal 2005 from 4.6% in fiscal 2004. The Company had a segment operating profit of $8.6 million in the first half of fiscal 2005 compared to a segment operating profit of $10.4 million in the first half of fiscal 2004. Included in segment operating profit for the first half of 2005 were charges of $1.7 million for a work stoppage and restructuring and severance charges of $5.2 million resulting primarily from the exit of the Company’s wallcovering distribution business and other workforce reduction initiatives. Included in segment operating profit for the first half of 2004 were restructuring and severance charges of $0.4 million relating to restructuring activities in fiscal 2003. Excluding these items, segment operating profit was $15.5 million in the first half of 2005 compared to $10.8 million in 2004. Operating margins for the first half, excluding these items, increased to 3.9% in fiscal 2005 from 3.1% in fiscal 2004.

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For the three months ended May 31, 2005 and 2004, the Company had net income of $3.6 million, or $0.09 per diluted share, and $0.3 million, or $0.01 per diluted share, respectively. Excluding the restructuring and severance charges of $1.0 million and $0.1 million in the second fiscal quarters of 2005 and 2004, respectively, the Company had net income of $4.6 million, or $0.11 per diluted share, in 2005 compared to net income of $0.4 million, or $0.01 per diluted share, in 2004. For the six months ended May 31, 2005 and 2004, the Company had net losses of $7.3 million, or $0.18 per diluted share, and $5.5 million, or $0.14 per diluted share, respectively. Excluding the charge of $1.7 million for the work stoppage in fiscal 2005, and the restructuring and severance charges of $5.3 million and $0.4 million in the first halves of 2005 and 2004, respectively, the Company had a net loss of $0.3 million, or $0.01 per diluted share, during the first half of fiscal 2005 compared to a net loss of $5.1 million, or $0.13 per diluted share, during the first half of fiscal 2004.

Performance Chemicals

Performance Chemicals’ net sales increased 28.9% to $118.1 million during the second quarter of fiscal 2005 compared to $91.6 million during the second quarter of fiscal 2004, driven by product pricing actions of $23.9 million and volume increases of $2.6 million. Net sales for the Paper and Carpet chemicals product line increased 32.8% to $78.2 million during the second quarter of fiscal 2005 compared to $58.9 million during the second quarter of fiscal 2004, primarily as a result of pricing actions of $18.4 million and volume increases of $0.9 million. Net sales for the Specialty Chemicals product line increased 22.0% to $39.9 million during the second quarter of fiscal 2005 compared to $32.7 million during the second quarter of fiscal 2004, primarily due to pricing actions of $5.5 million and volume increases of $1.7 million.

This segment generated an operating profit of $11.0 million for the second quarter of fiscal 2005 compared to $4.7 million in the second quarter of fiscal 2004. Included in segment operating profit for the second quarter of 2005 were restructuring and severance charges of $0.4 million resulting primarily from workforce reductions. Excluding these items, the segment would have incurred an operating profit of $11.4 million for the first quarter of fiscal 2005. The improvement in segment operating profit was due to pricing actions of $23.9 million, cost reductions and volume increases of $2.2 million, partially offset by higher raw material costs of $19.4 million.

Performance Chemicals’ net sales increased 28.2% to $220.2 million during the first half of fiscal 2005 compared to $171.8 million during the first half of fiscal 2004, driven by product pricing actions of $44.6 million and volume increases of $3.8 million. Net sales for the Paper and Carpet chemicals product line increased 32.7% to $147.2 million during the first half of fiscal 2005 compared to $110.9 million during the first half of fiscal 2004 primarily as a result of pricing actions of $35.2 million. Net sales for the Specialty Chemicals product line increased 19.9% to $73.0 million during the first half of fiscal 2005 compared to $60.9 million during the first half of fiscal 2004, primarily due to pricing actions of $9.4 million and volume increases of $2.7 million.